A ‘zhengyou’ to China? Signing with Obama on trade puts this friendship to the test

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James Laurenceson does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

The task of simultaneously negotiating our traditional security and cultural ties with the US, and our burgeoning economic relationship with China, can justifiably be described as the “great foreign policy challenge of our time”.

US President Barack Obama’s announcement of a reinvigorated Trans-Pacific Partnership (TPP) agreement, made on the sidelines of the APEC summit in Hawaii on Saturday, has brought this challenge to the fore once again.

The US sees the TPP as an initiative through which it can demonstrate its economic leadership in the Asia-Pacific region, a region that will remain the world economy’s most dynamic into the foreseeable future. The Australian government’s enthusiasm in signing up to the TPP therefore sends a clear signal to other countries in the region that it embraces US leadership, as well as its strategic priorities.

Unique and ambitious

The TPP is unique among free trade arrangements (FTAs) in that it aims to not only reduce tariff and non-tariff barriers, but also liberalise investment flows, and promote regulatory convergence around matters as diverse as labour and environmental standards and intellectual property right protection.

It is also unique in the ambitious 12-month timetable set for its completion. The Department of Foreign Affairs and Trade (DFAT) already describes it as the “government’s highest regional trade priority”. Keep in mind that Australia is also in the midst of negotiating FTAs with China and Japan.

The sales pitch from Prime Minister Julia Gillard and Trade Minister Craig Emerson regarding the TPP has been firmly economic in nature. The liberalisation of international trade and investment creates jobs, but the Doha round of the World Trade Organisation’s (WTO) sponsored multilateral negotiations has stalled, and so other avenues must be pursued.

Not convincing

However, the economic case for the TPP is far from convincing.

Gillard has made the point that the nine countries that have signed up to the TPP account for around one quarter of world GDP. The fact is that the US share of world GDP in 2010 was 23.1%. The share of the other eight countries combined, including Australia, was just 3.7%.

Moreover, Australia already has an FTA with the US. Likewise, it already has an FTA with Singapore, the third largest economy in the TPP after the US and Australia, as well as with other TPP members, New Zealand and Chile.

China believes the Obama’s APEC Trans-Pacific Partnership is about containment.AAP

China and Japan, by far the most important destinations for our exports, are not part of the TPP. Consider this – in 2010-11, Australia’s merchandise exports to China amounted to $A64.8 billion, up 39.4% on a year earlier. Merchandise exports to the other eight TPP countries combined amounted to $A28.6 billion, up 3.9%.

Thus, where the marginal gains will come from is not clear.

Might the timely completion of the TPP encourage China and Japan into the fold? Japan’s government has indicated an interest in joining, but faces a massive job in overcoming a domestic farming lobby firmly opposed to the deal and that has largely successfully resisted previous attempts at liberalisation.

Damage to our relationship

However, the main economic risk associated with the TPP for Australia is the damage it might do to our relationship with China.

The TPP feeds directly into the already strong fear in China that the US seeks to contain their economic emergence, despite what US Secretary of State Hillary Clinton might say to the contrary. China had, after all, already outlined its own preferred modes of deepening regional engagement, notably the ASEAN plus 3 and ASEAN plus 6 groupings.

The official media in China has begun espousing this containment line, as well as expressing annoyance that China was not invited to participate in the TPP. Prime Minister Gillard’s comment that any country, including China, can join the TPP is disingenuous. If the TPP does include elements such as regulatory convergence then China has little realistic hope of joining and the Australian Government must have known this.

It is worth noting that if Japan did in fact join the TPP it would only add to China’s fears of being boxed in. Likewise, the announcement by Taiwan’s President Ma Ying-jeou that it too is interested in joining, albeit over a longer time frame, has the potential to create enormous tensions in China.

Biggest danger

Perhaps the biggest danger for Australia is that the TPP will go nowhere or achieve little and China will have been alienated in the process. For example, how Vietnam intends to achieve regulatory convergence with countries like the US and Australia on matters such as labour and environmental standards is far from clear. Indeed, how the US plans to wean its own domestic agricultural sector off farm subsidies is also uncertain.

To be sure, China will continue to buy our iron ore even in the event of a TPP. Negative consequences for Chinese investment in Australia are potentially greater, particularly given that most of China’s investment abroad is conducted by state-owned enterprises.

And any fantasy that Australia is viewed in China as a “zhengyou” - a true friend - will have taken a sharp beating: in 2008, former Prime Minister Rudd remarked in a speech at Beijing University that: “A true friend is one who can be a zhengyou, that is a partner who sees beyond immediate benefit to the broader and firm basis for continuing, profound and sincere friendship.”

All of the above suggests that there is little to like in the TPP from an economic perspective. However, even this academic is happy to concede that economic considerations alone cannot and should not dictate our foreign policy. For example, many Australians would be pleased that labour and environmental standards are now assuming a place in trade negotiations. But in doing so, let’s at least be clear about the likely benefits of the deal, along with its potential risks.